New apartment buildings that once promised not-so-humble lodging for high-income energy workers are emerging as a symbol of oil-boom excess.Low oil prices and a droopy employment picture threaten to leave some of the newest towers and balconied boxes with empty floors. With far fewer jobs being created than when many of these upscale projects were launched, landlords are cutting rent, waiving months of payment and offering hefty referral bonuses to lure new residents.

"It could be as bad as the office situation in the 1980s: Lots of vacancies, lots of space that goes to waste and a lot of developers saying, 'What was I thinking?' " local economist Patrick Jankowski warned earlier this week. Apartment Data Services, which tracks rental trends across the region, has come to the same conclusion. "Overbuilt," it declares in its 2016 forecast. "Too much supply for demand."

Even one relentlessly upbeat CEO admits he has put a downtown apartment project on hold to wait for a market recovery."It won't be as bad as people think," said Ric Campo of Camden, which has residential projects across the city. "But now, it's going to be a tenant's market." Clark Mott has watched the transformation from his posh pad in the Upper Kirby area. After landing his first job with an oil and gas firm a year ago, he felt confident enough to sign a lease for $1,400 a month for a one-bedroom apartment that was close to work and inside Loop 610.

Concessions made

Now, hawkers on the street below spin oversized advertising signs to draw people in. Mott says his apartment complex is offering concessions to new renters and $1,500 referral checks to those already there."There are a lot of empty apartments these days around the complex," Mott said.

The concessions are likely to grow more generous.

"We're getting to where two months free isn't enough," Jankowski said.In a worst-case scenario, he added, floors of some of the newly opened and generally more expensive complexes and high-rises will sit vacant, reminiscent of the officer-tower shells during the severe economic downturn of the 1980s.
Job growth largely propelled the apartment construction boom of the last several years, but Jankowski said the days of creating 90,000 to 100,000 jobs a year will not return for a while. The region is forecast to add about 22,000 jobs in 2016; at the same time, more than 29,000 units in 102 properties are under construction.

About 20,000 of those units will open this year.

In the recent good times - before crude prices tumbled to around $30 per barrel from above $100 - the region was able to absorb 10,000 to 12,000 multifamily units a year, but Jankowski said that slower job growth likely will cut that rate. And once oil prices tick back up, he said, the companies will pay down an estimated $200 billion in debt that accumulated during the boom before adding jobs.

Addressing apartment developers recently, Stacy Hunt, a Houston-based partner with Greystar, called today's rental market "a whole different environment." He, too, remained optimistic about riding out this current downturn. "We'll catch our breath between now and probably summer of 2017," Hunt said. "Until then, you will see some rents effectively that are lower than what the developer projected."

More high-end units

Hunt said Charleston, S.C.-based Greystar, which has several apartment projects coming online in Houston, does not predict mass foreclosures. He said apartment builders have more equity than they did in previous decades, and the quality of construction and a trend toward renting over homebuying in Houston still favor developers. Austin Kroschel and Hayley Dippon feel like they are better off renting for now. They recently signed a lease for a new place before they tie the knot next month. The couple was pleased to see that rent for the complex on West Dallas Street dropped nearly $300 from when they were looking last spring.

During their search, they found leasing offices offering free months, waiving application fees and offering such incentives as free trash pickup. The couple came in under their projected budget with $1,350 a month for a one-bedroom apartment.

The oil boom had a clear impact on the types of apartments being built in Houston. The market now is skewed toward the high-end, or Class A, products, said Bruce McClenny of Houston-based Apartment Data Services. He said the higher end stock is overbuilt and expects rent occupancy across the area to fall to 89 percent this year after a lengthy period of steady increase. Also, he said, top-end apartments traditionally account for about 17 percent of the market here. Now, it's closer to 24 percent. These newly built units average $1,400 a month. The overall rental price in the Houston region is $996. Since March 2012, at least 6,240 units have been knocked down or are still slated for demolition, according to data from the apartment data collection service. Most of those apartments were on the lower end and had cheaper rents than the new construction replacing them.

'Let's not overreact'

Jankowski said he senses some denial among bullish developers. "There's always this belief that people with deep pockets are going to be willing to spend lots of money on apartments and houses and nice things," he said. "I think it's a little wishful." On Friday morning, Campo, the Camden CEO, told investors and media in a conference call about earnings that losses in energy jobs here will be partially offset by gains in health care, education, hospitality and government. Still, he acknowledged it will be a slow year for Houston, the company's second largest market, and that the city "has too many apartments coming online" given that slower growth. "While we expect Houston to be our slowest market in the near term, the market will hold up better than people expect," Campo said. "Low oil prices are good for America and especially our residents." Cyrus Bahrami with Alliance Residential said construction has slowed, too. He said his company closed seven deals in 2014 but only one deal last year. He expects one deal this year. "The music has stopped on the development side," Bahrami said. "Let's not overreact. We have a lot of opportunity to take advantage of the situation."

Marvy Finger of Finger Cos., who opened luxury downtown tower One Park Place just as the last national recession got underway, predicts he'll have to drop rents at new projects in downtown and Montrose by roughly 9 percent. But he's not giving up on those areas. Finger said he has ridden out rough years before and learned from the 1980s bust to build only in desirable areas. Take One Park Place, for example. During the last recession, he offered up to three months' free rent to lure tenants. But the tower has had roughly 97 percent occupancy, with rents from $2,800 to $8,000 per month, the past several years.

Friday, January 29, 2016

With Houston choking on traffic congestion from Clear Lake to Jersey Village, an infusion of $447 million in state funds promises relief sooner than expected at three notorious freeway bottlenecks.

That sum amounts to more than one-third of $1.3 billion allocated to relieve congestion in major Texas cities where officials announced targeted projects Wednesday. As a result, major upgrades to the Loop610 interchange with U.S. 59 near Uptown and widening of Interstate 45 south of Houston and Interstate 10 west of Katy will happen years before initially predicted.

“The sooner you can get it constructed … chances are it will be a lower price as opposed to a higher price,” Texas Department of Transportation spokeswoman Raquelle Lewis said. “And the faster drivers receive relief.” Construction will stretch from 2017 to 2021.

Tasked in September by Gov. Greg Abbott to address congestion in the state’s five largest metro areas, state transportation officials directed $1.3 billion to Houston, Dallas, San Antonio, Austin and Fort Worth. The spending plan requires approval by the Texas Transportation Commission, likely next month. Commissioner Bruce Bugg led various sessions in the five metro areas, consulting with local TxDOT officials and others to find projects that could get the state the most bang for its buck now.

“Those five metropolitan areas represent two-thirds of the Texas population,” Bugg said. “They have 97 percent of the top 100 most congested roads in Texas. We have been rifle-shot focused on getting something done there.”

Five of the state’s 10 most congested roadway segments in 2015 were in Harris County, according to TxDOT. A segment of Loop 610 that includes its intersection with U.S. 59 was ranked second, after a stretch of Interstate 35 in Austin.

“I’d give anything, just once, to get to work without sitting still on Loop 610,” said Jim Matthews, 56, who works in Bellaire and commutes from Jersey Village.

At peak times, some segments of Houston freeways have average speeds slower than most cyclists. Along southbound Loop 610 from Interstate 10 to Post Oak in the Uptown area, the average speed between 4:45 p.m. and 6 p.m. dipped below 12 mph in 2015, down from about 15 mph in 2014 and 18 mph in 2013.

The difference in eveningnorthbound traffic is greater, with average speeds between 4 p.m. and 6 p.m. below 20 mph, compared with about 45 mph or more in 2013 and 2014.

The focus on congestion, and voter approval in 2014 and 2015 of new road spending, changed that strategy. The congestion-relief money includes $132 million for this project, making it possible to rebuild the entire interchange at once.

That means new lanes and more effective ramp designs will arrive sooner, although congestion is likely to be even worse during construction.

The three projects were selected because they can provide substantial relief for drivers and were planned and approved so that construction could start in a few months.

“What we are finding is there are a number of projects out there that everybody knows what they are, that just lack the funding,” Bugg said, noting that projects were prepared in all five metro areas.

I-10 west of Katy is just such a chokepoint, where Austin and San Antonio-bound drivers commonly see traffic stop or slow significantly.

Matt Simon, 49, who drives that stretch of I-10 three or four times a week, was thrilled to hear of the planned widening to three lanes in each direction to the Brazos River. “Thank Jesus,” Simon said.

More to do

Shelved because hardly any of the $242 million widening cost was covered, the I-10 segment jumped to the top of the list primarily because it was among the most attractive projects ready, Lewis said. About $209 million will come from the relief package.

“It is a pressure point that is consistently expressed,” Lewis said of the I-10 widening.

The I-45 project would use $106 million in relief money to widen the interstate to four lanes in each direction from NASA 1 to FM 518, and build new frontage roads. The project continues work along I-45, which TxDOT plans to widen to Galveston.

Other areas with worse congestion, such as I-45 through downtown, were not as far along in planning and approvals.

“If we had the I-45 project cleared and ready for funding, it would have been certainly considered,” Lewis said. “The key is what can we effectively mobilize and advance.”

The downtown plan, expected to cost at least $6 billion, is not ready for construction, though it is inching closer. The last set of federal approvals is expected next year.

With congestion money likely to continue, other projects stand to benefit.

“This isn’t anticipated to be a one-hit wonder,” Lewis said.

Road focus

The relief, as specified by Abbott and state officials, was focused strictly on making highways more efficient or larger. The money excluded transit.

Most Texans drive, Bugg said: “We have to be mindful of that.”

Among the 10 largest urban areas in the U.S., however, only Dallas has more miles of road per person than Houston. Houston has 4.5 miles of road for every 1,000 people, according to 2013 figures compiled by the Federal Highway Administration. Washington, D.C., and Detroit, with slightly larger urban area populations, have 3.2 and 3.9 miles per 1,000 people, respectively.

Bugg said transit is important and can help ease road congestion, but state officials should focus on leveraging local money and competing more for federal transit funds.

“My suggestion is since most transit dollars are federal dollars, we go after that programmed money that is automatically going to the Northeast Corridor,” he said, referring to large federal funding for transit

Thursday, January 21, 2016

I come away from looking at the data that everything is relative. The declines from 2014 to 2015 are modest at best - and healthy in the long run. We were at such high levels in terms of sales and prices, a cooling off period could bring a much needed market adjustment.

Wednesday, January 20, 2016

Oil Slump Hits Houston Home Market

Energy boom drove run-up in prices, but now buyers are getting skittish

ENLARGE

Olu Fagbemiro and her husband persuaded a builder to cut $14,000 from the price of their new Houston home as low oil prices hurt the city’s housing market.PHOTO:SCOTT DALTON FOR THE WALL STREET JOURNAL

Home-construction permits in the area plunged 26% from a year earlier in the third quarter, while December sales of existing single-family houses fell nearly 10% from the same month of 2014, according to data from the Commerce Department and Houston-area brokers.

Builders are hustling to reverse declining sales and rising cancellation rates by beefing up incentives. KB Home in October advertised homes in several of its Houston developments with price cuts of up to $31,000 and commissions available to buyers’ agents of $2,000 to $10,000.

Overall, the area’s average single-family home price was down about 7.5% to just over $280,200 in December from its June record high, according to the Houston Association of Realtors. Even the high end is hurting: The average sale price for luxury homes, defined as the top 5% of the market, fell 5% to $1.3 million in the fourth quarter from the same period a year earlier, according to real-estate brokerage Redfin.

Behind the slump is the plunge in oil prices from close to $100 a barrel in August 2014 to about $29 Monday.

“While Houston has figured out how to diversify [its industry makeup] a lot, we still are an oil-and-gas city,” said Scott Merovitch, Houston division president for closely held builder Chesmar Homes LP, which saw a higher cancellation rate in Houston in 2015 and notched 20% fewer sales. “We’re going to ebb and flow with oil and gas.”

Across the country, regions where housing markets rode the energy boom look shaky. Home prices in North Dakota are 22% overvalued, while the figure in Texas is 15% and Colorado’s prices are 10% too high, based on the historical average ratio of prices to incomes, according to Arch Mortgage Insurance Co.’s Housing and Mortgage Market Review.

Oil prices tripled between 2009 and 2014, helping Houston outpace every other U.S. metropolitan area in home construction in the period. Prices for existing Houston homes rose 37% since 2011.

The first sign of trouble came in mid-2014, when oil prices began their decline. Houston’s home sales managed to sustain their momentum until this past summer, when news of the Iran nuclear accord spurred concerns of increased Iranian oil production adding to a supply glut. At the same time, big Houston oil-and-gas employerConocoPhillips warned workers of layoffs.

Olu Fagbemiro and her husband were concerned enough about instability in the industry to demand a price cut on the home they were under contract to buy. Ms. Fagbemiro, a consultant and engineer for the oil industry, and her husband, an accountant in the industry, in October got Keystone Classic Homes to cut $14,000 from the price of their three-bedroom home under construction near downtown Houston, to $621,000.

Ms. Fagbemiro said her husband’s job isn’t in peril, but they believed the industry’s struggles were reason enough to renegotiate. They “had information on companies laying off people, and we thought the [housing] market will continue to stay stagnant for quite a bit of time,” Ms. Fagbemiro said.

Michele Marano, a Houston real-estate agent who specializes in oil-and-gas clients and worked with Ms. Fagbemiro, said “my buyers have completely backed off.” She added, “I have an enormous number of buyers but they’re sitting.”

Few neighborhoods illustrate Houston’s slowdown as dramatically as the communities that sprouted since 2011 around the site ofExxon Mobil Corp.’s 385-acre campus just north of Houston. Roughly 10,000 workers, most already living in Houston, moved to the campus as it opened in phases in 2014 and 2015. Developers readied thousands of lots for upscale houses in anticipation of a flood of oil executives moving to the area.

Now, unsold homes sit near the Exxon Mobil campus, with the supply of so-called speculative houses there exceeding the metropolitan area’s average since the second quarter of 2014, according to housing market researcher Metrostudy, part of Hanley Wood LLC.

The higher end of Houston’s market has been hit especially hard. The number of unsold lots for homes priced at $400,000 and up has ballooned, said Lawrence Dean, a Metrostudy senior adviser in Houston, who estimated it will take three to four years to exhaust the supply.

Likewise, the number of homes listed at $1 million or more rose 54% in the third quarter from a year earlier, according to Redfin. The surge allows buyers to be more selective and forced some sellers to cut prices.

Gary Sova and his wife, Beth, were able to negotiate a roughly $140,000 discount on a home in the $1 million range in the Woodlands, near the Exxon campus.

Mr. Sova, a 62-year-old executive in the waste and recycling business, said the market shifted significantly in favor of buyers from when they started looking in February with their real-estate agent, Amy McGee, to when they bought the home in early November. He said many buyers were selling because they had lost jobs or were relocating.

Agents started to say “just make me an offer.” That never happened at the beginning of their house hunt, he said.

Local commercial real estate drew $1.7 billion in international investment last year

A Metro light rail line runs by downtown's 1000 Main, which sold for $440 million last year.

Foreign investment in Houston commercial real estate spiked to at least $1.7 billion last year, even as low prices in the oil patch dampened the local economy.

And though international investors now say they are less bullish on the area, local realty experts remain confident in the market's long-term attractiveness.

The city remains seen as a more affordable alternative to such cities as New York and San Francisco that frequently top the list for international investors, said veteran broker Ed Wulfe, chairman of Wulfe & Co. These investors also are drawn by Houston's friendly business climate and relative ease of development, he said, and the current slump in crude prices and the slowdown in the energy industry will not deter them.

"There is a psychological awareness of the energy weakness, but there is no question that short-term and long-term, energy will be back, and we'll be at the center of it," said Wulfe, who is chairman of Houston-based Wulfe & Co.

For the first time in several years, the Bayou City lost its spot among the top 5 U.S. cities where foreign investors want to put their money, according to the just-released annual survey of the Association of Foreign Investors in Real Estate, a trade group representing international institutional real estate investors.

Houston ranked 11th among U.S. cities in the 2016 AFIRE survey, falling from No. 3 the previous two years.

MORE INFORMATION

Survey snapshot

Rankings of cities for global investments based on a survey of members of the Association of Foreign Investors in Real Estate:

Top global cities

1. New York (No. 1 last year)

2. London (No. 2 last year)

3. Los Angeles (No. 10 last year)

4. Berlin (No. 7 last year)

5. San Francisco (No. 3 last year)

27. Houston (No. 6 last year)

Top U.S. cities

1. New York (No. 1 last year)

2. Los Angeles (No. 4 last year)

3. San Francisco (No. 2 last year)

4. Washington, D.C. (No. 5 last year)

5 (tie). Seattle and Boston (No. 8 and No. 6 respectively last year)

11. Houston (No. 3 last year)

Source: Association of Foreign Investors in Real Estate survey conducted by the James A. Graaskamp Center for Real Estate, Wisconsin School of Business

Among global cities, Houston ranked No. 27 this year, down from No. 6 last year and No. 4 the year before.

The fall in the rankings coincides with a protracted decline in the price of oil, but local realty experts say foreign investors tend to be in it for the long haul and are not that concerned about the down cycle.

Plus, Houston's trophy buildings are still getting top dollar from overseas investors who are drawn to the stable political and economic climate in the U.S.

Among last year's larger deals, a German realty fund manager purchased downtown's 1000 Main for $440 million and a private investor based in Spain purchased BBVA Compass Plaza at 2200 Post Oak Blvd. in Uptown.

"Foreign investors have typically looked at core Class A properties with credit tenants with longer lease terms. That is still the case as evidenced by the sale of 1000 Main and BBVA Compass in 2015," Rudy Hubbard, managing director capital markets-investment sales at commercial real estate firm JLL, said in an email.

"The falling oil prices did not have any negative impact on these core deals. There will be continued foreign interest in core deals in 2016 despite the job losses in the energy industry."

More than doubled

Indeed, foreign investment in Houston commercial real estate more than doubled in 2015 to $1.7 billion, a report from real estate research firm Real Capital Analytics shows. That's the most of any year since at least 2008, the earliest figure cited in the report, which charts the local commercial real estate scene.

The amount represents 14 percent of the $12 billion investors spent on Houston commercial real estate last year, based on preliminary figures in the Real Capital Analytics report. The $12 billion, which could grow as year-end sales are added to the tally, is below the 2013 peak of $14.8 billion, of which $1.6 billion was foreign investments.

17% of the total

Nationally, foreign investment amounted to $87.9 billion in 2015, or 17 percent of total investments, according to Real Capital Analytics. The investors in Houston real estate came from China, Germany, South Korea, Spain, Canada, Israel and elsewhere.

On the newest AFIRE survey of foreign investor attitudes, New York held its spot as the most desirable city both globally and in the U.S., the survey found. London maintained its place as the No. 2 international city. Los Angeles, which had slipped No. 10 among international cities in 2015, claimed the No. 3 spot this year.

In the U.S., apartments and industrial properties tied as the preferred type of property for foreign investments, followed by the retail, office and hotel sectors, according to the AFIRE survey.

Though there is some concern of higher interest rates, none of the AFIRE members planned a major decrease in investments, according to the survey.

Nearly two-thirds of members said they expect to have modest or major increases in their investment in U.S. real estate in 2016, the survey found. Another 31 percent plan to maintain or reinvest their investments. No one reported plans for a major decrease.

"Foreign capital continues to view the U.S. as the safe haven that it is typified by stable, albeit expensive markets," AFIRE chairman Frank P. Lively said in an announcement.

The survey was conducted for AFIRE by the James A. Graaskamp Center for Real Estate, Wisconsin School of Business. Its membership consists of nearly 200 international institutional real estate investors from 21 countries with some $2 trillion in assets under management.